Question

Your friend argues real GDP per capita is a poor measure of economic well-being. He says the statistic fails to consider factors such as pollution and leisure. Provide a counter argument that defends the use of real GDP per capita as a welfare measure.

Answer 1

GDP calculates both the overall revenue of the economy and the total spending on goods and services of the economy. As a consequence, GDP per person informs us the income and expenditure of the average person in the economy. Since most people would like to have higher incomes and higher spending, GDP per person tends to be a natural measure of the economic well-being of the average citizen.

This can be called a welfare component. The amount of goods and services available to the average citizen clearly contributes to welfare in the larger context, although, of course, it is far from being the only part. It is therefore possible to imagine a social welfare function that has GDP as one of its components alongside health, equality , human rights, etc. GDP is also an measure of human well-being. In cross-country results, per capita GDP is strongly correlated with other variables that are important for welfare. In particular, it is positively associated with life expectancy and is negatively correlated with child mortality and inequality.

Real GDP per capita eliminates the effects of inflation or price increases. Real GDP is a better indicator of living conditions than nominal GDP. A country that produces a lot is going to be able to pay higher wages. This means that its residents can afford to purchase more of its abundant inventory.